A Reed Smith State Tax Blog on the Taxation of Emerging Technologies

Montana: OTCs Subject to Retroactive Sales Tax Assessments

Recently, the Montana Supreme Court ruled 5-to-2 that online travel companies (OTCs) were subject to sales tax under the existing sales tax statute. Furthermore, their liability is retroactive to November of 2010. However, the OTCs were not subject to lodging tax.

Sales tax is imposed “on the purchaser and must be collected by the seller.” A seller is defined as one who “makes sales” of services. The majority held that the OTCs were providing services and therefore subject to sales tax.

The majority allowed retroactive collection because, under the same analysis, the sales tax’s plain language included OTC receipts. Therefore, the Department’s inaction and the OTC’s inability to seek reimbursement from past customers did raise an issue of equity.

Lodging tax is collected by “the owner or operator of a facility.” Montana did not define the term “owner or operator.” That left the Supreme Court to apply the dictionary definition and hold that OTCs do not run hotels. Therefore, OTCs had no duty to collect lodging tax.

The Montana Supreme Court rejected the Department’s argument to adopt the neighboring Wyoming Supreme Court’s ruling. This ruling adds to the crazy-quilt tax obligations individual state and local governments impose on OTCs.